Lumber Decline Signals Lower U.S. Yields: Technical Analysis

April 15 (Bloomberg) -- A drop in the price of lumber may
signal the yields on the 10-year Treasury note will fall as the
Federal Reserve ends its $600 billion Treasury-purchase program
in June, according to Nomura Holdings Inc.

The benchmark yield may decrease to as low as 3.25 percent
after the Fed completes the program known as quantitative
easing, George Goncalves, head of interest-rate strategy at
Nomura, said in an interview. The firm is one of 20 primary
dealers that trade directly with the U.S. central bank. Lumber’s
decline last week signaled a broader drop in commodities and a
slide in yields this week, he said.

“All commodity boats rose together, and now they are
settling down and will be driven by underlying fundamentals,”
Goncalves said. “Once the Fed stops, we’ll see yields stabilize
or head slightly lower.”

Ten-year notes yielded 3.50 percent yesterday in New York,
up four basis points, or 0.04 percentage point, in the yields’
first rise in three days. Lumber futures for July delivery fell
by the exchange limit of $10, or 3.6 percent, to $266 per 1,000
board feet on the Chicago Mercantile Exchange, and the Thomson
Reuters/Jefferies CRB Index of 19 raw materials was at 360.66,
up 0.3 percent.

Lumber has tumbled 22 percent since touching $340 per 1,000
board feet on Jan. 4, the highest level since May 2006. The CRB
Index advanced for the past three weeks and touched 368.96 on
April 11, the highest level since September 2008, before sliding
1.5 percent through yesterday.

‘Very Quickly’

“Lumber tells you how weak the commodities market could
be,” said Goncalves, who noted the link in a note to clients on
April 13. “When there’s the need to re-price, it happens very
quickly. The bond market doesn’t follow one for one, but it will
take away some of the inflation concerns, which is supportive
for the bond market.”

The price of lumber and the yield on the 10-year note have
maintained a correlation since the Fed began its Treasury-buying
program in November to spur economic growth, Goncalves said.

“If we have less stimulus and the economy is not on a
strong footing, then we may not be able to sustain inflation,”
Goncalves said. “We see signs of growth slowing here and
overseas, including China, and that will curtail how high
commodities can go.”

Yields on 10-year Treasury notes have climbed from 2.59
percent on Nov. 2, the day before the Fed announced the $600
billion program, to a high of 3.77 percent on Feb. 9, the most
since April 2010, as investors moved to other asset classes.

The yields will trade between 3.25 percent and 3.5 percent
through June, Goncalves said.

Wholesale costs in the U.S. rose less than expected last
month, gaining 0.7 percent compared with a 1.6 percent increase
in February, a Labor Department report showed yesterday. The
median forecast in a Bloomberg News survey was for a 1 percent
advance.

In technical analysis, investors and analysts study charts
of trading patterns to forecast changes in a security,
commodity, currency or index.